Earny Asks: Trump Wants to Sack Powell. Should He?
How important is the Fed Chair to a healthy stock market?
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Trump, Powell, & the Stock Market
Whether you love the President’s policies or loathe them, the stock market continues to climb a wall of worries, having set a new high this past week.
The policies that the stock market seems to love include low taxes, which increase corporate profits, and a reduction in regulations, which allow companies to conduct business with less, uh, friction. That low friction will allow companies to grow quickly. This isn’t the place to debate those policies, only to acknowledge that they benefit business and that’s resulted in an increase in stock prices.
The President, however, has his sights set on the head of the Federal Reserve Board, Jerome Powell.
You see, the Fed sets the short-term borrowing rates and has the dual mandate of trying to maintain high employment rates and low inflation. And those two things can be at odds. You see, inflation is an increase in the price of goods and services that people buy. And people like to buy things when they have money. Oh, and when do people have money? When they’re working.
So, the Fed’s job is a tough one. They need to balance keeping you an me employed with keeping our weekly grocery bills low.
Donald Trump thinks the Fed is doing a terrible job. You or I may disagree. But that doesn’t matter. While the Fed is supposed to act independently of the President, the President may try to influence the Fed.
In this case, Donald Trump thinks that interest rates are too high. He wants to lower rates in order to refinance government borrowing. The Fed, too, thinks rates might be too high, but they’re also worried about possible inflation from tariffs and want to wait a little longer before acting. The Fed needs to be cautious.
Donald Trump has made no secret of his dislike for Fed Chair Powell, saying that “He’s a terrible Fed chair. I’m surprised he was appointed…”
It was Donald Trump who appointed Powell.
No matter who appointed him, Trump can’t just fire the Fed Chair. Again, because there are checks and balances in the government designed to maintain stability in the economy. Markets LOVE stability because corporations can then make decisions today that will influence their business next year. In other words, they can hire people!
But there is one way that a president can fire a Fed chair. If it is for cause.
This week, we learned that Trump has drafted a letter that could put Powell on the curb. It was based on cost overruns as a result of the Fed’s building renovations. It’s not like he’s adding golden toilets to the building. As anyone who’s ever done a renovation knows, it usually takes longer and costs more than expected. Things crop up that can be hard to budget for. Were mistakes made? Probably. I have no idea. Powell says the renovation will save money in the long run. Is he right? I don’t know. And for the purposes of our discussion, it doesn’t matter.
If Powell is shown the door, Trump’s appointee will surely lower rates, which will be good for business and increase employment, although they will surely increase inflation, too.
So, Earny Asks, what did markets do upon learning that Powell might be fired?
- They went up
- They went down
- Traders ate tacos
Answer
They went down.
Then, when Trump calmed markets by saying that he wasn’t going to fire Powell, stocks rallied back.
This week, Ed Ponsi had advice for the President. In Here’s the Surprise Move Trump Should Make With Jerome Powell, Ed tells us that President Trump should keep Jerome Powell as Fed Chair.
Ed says that Powell’s actions have been exactly what the market has needed and is one reason why stocks are at new all-time highs.
An indepent Fed chair is extremely important. That role is key in balancing growth, so we don’t see volatility in the economy. Ed goes on to say that re-igniting inflation “is that last thing that consumers need, as they are still reeling from the worst bout of inflation in the past 40 years.”
“While the rate of inflation has moderated, it seems unlikely that prices will decline from their lofty levels. Another bout with inflation could cost Trump dearly in the popularity department, even among his biggest supporters.”
So, what is Ed’s advice for the president?
Renominate Powell for another term.
As “yin to Trump’s yang,” it would prove that Trump could work with people he doesn’t like. Additionally, Powell will err on the side of caution to keep inflation in check. Stocks would love this and Ed says that it will give Trump the best chance for his agenda to succeed.
The lesson? The economy and markets are extremely fragile. Companies need stability so that they have clarity to make growth forecasts and hire employees. And that stability is good for investors, who prefer to invest when they can forecast their risk.
Have a great weekend.
